Michael Price is angryand hes not gonna take it anymore. At least thats what he told Institutional Investor in a recent conversation centered on the decline of the New York Stock Exchange. Price turned his wrath on the venerable exchange as well as on the Securities and Exchange Commission for creating conditions that he says have hurt mutual funds and other traditional, long-only investors. Price, the former mutual fund chief known for his value style of investing, also has harsh words for the impending marriage of the NYSE Euronext to Deutsche Börse. With more regulatory hurdles still to clear, this combination, announced last February, no longer looks like a slam-dunk. If the merger fails, it would join other exchange combo no-goes like the previously proposed NYSE merger with NASDAQ OMX Group and the Intercontinental Exchange and the London Stock Exchanges misbegotten run at Canadas TMX Group.
Price, president of the Michael F. Price Foundation, Inc. and managing partner of MFP Investors LLC, his family office, was formerly CEO and president of Franklin Mutual Advisers from 1986 until November 1, 1998. This week he told Senior Writer Frances Denmark how he feels about the changes at the NYSE while still managing some optimism about the future of equity trading.
How has equity trading changed?
When you go down on the floor to execute some size, you get creamed these days, absolutely creamed. Between the high speed trading firms and the algorithms and the brokers, it makes it really difficult. High frequency trading has really hurt. In many ways its invisible but it hurts. Im on a trading desk every day trying to get decent size done. Im not talking huge size because Im just running a family office, but its decent size, larger than your average retail investor. But its got a cost. Its much harder to execute.
Where does the blame for this lie?
It comes from the multi-year trend of the [New York Stock] Exchange and the SEC ignoring what I feel that their obligations to investors are. The SEC and the New York Stock Exchange have left the markets in shambles. They really made a huge mistake allowing these computer-driven, super high speed order systems to front run orders; to anticipate larger orders to take offerings in front of an order, and then re-offer it up a penny or two, to scarf a penny or two. That was a total dereliction of duty on the part of the SEC and the NYSE.
How did this come about?
They have all these experts who are basically paid by the interested parties testifying to the fact that high speed trading increases liquidity. Thats nonsense. Liquidity is worse. They are all academicians who are getting paid by people who profit from it. Youve got hedge funds doing it, youve got broker dealers doing it, guys who are set up to use fast machines. But its hurting investors. The regulators are fast asleep just as they were fast asleep in the past few years with some other individuals out there.
What other problems do you see at the NYSE?
Unfortunately the New York Stock Exchange has dirty hands. Not only are they selling out to a foreign competitor, which is a joke, but theyre allowing these trading systems to hurt their customers. Their customers are individuals in mutual funds. Theyre not protecting their customers the way Dick Grasso did. Looking back over my career, looking back over a long period of time, the New York Stock Exchange has abdicated in the last four or five years its duties to investors in a huge way. Thats why youve had lower volumes, youve had business move away from the exchange, youve had a foreign takeover of the exchange, less regulation of its members and broker dealers and its been poor for the confidence of investors. I dont know if were within a month of the NYSE merger closing. But its soon and its a bit of a tragedy in my eyes.
How do you feel about the decline in mutual fund assets today?
Equities are under-owned, they are smaller percentages of peoples portfolios than I could ever imagine. Active managementnot of ETFs or index fundsis very much less than I could ever remember. This business is going to come back. Im kind of an optimist. I think that trend is going to reverse because the performance of active managers will be better.